Being Right or Making Money

First off, the Title is a Rip off of a very interesting book by Ned Davis that I read and recommend you read it if you are interested in looking at market in different ways. Of course, not all the charts that are provided in the book can be easily re-created, but at the very least it will give you a idea on what to look at.

Yesterday, Bloomberg carried a report on  Khmelnitsky, an analyst at Veritas Investment Research Corp being the only Analyst to issue a Sell call even as hedge funds piled in. While he now turns out to be right, in the interim, the stock had doubled (from time of his Sell call). In fact, its still yet to reach the price where he called “Buyer’s Beware”. Chart from Bloomberg below (article link)

On Social Media / Television, Analysts keep calling for either a strong fall or a strong rise (new Low or new High in their lingo) even as much of the time, market seems to do the opposite of what they are calling for. But markets being markets, they do get it right at some point of time. The question as in case of VRX above is, does getting it right after being very wrong for a large period of time makes enough amends?

As one very well knows, Being Right is easy, making money, well that is a problem that sometimes seems absolutely insurmountable. But to make money, one needs to be right in the first place and right in the right time frame. There is no point in being right but being unable to make money due to the pains that the position caused first.

Investing / Trading is all about timing and positioning (size). If you get the timing wrong, you will end up taking substantial losses (Notional or Real) whereas if you get positioning wrong, you either end with too small a profit to bother about or too large a loss to be never able to trade again.

The reason Systematic Investment Planning (SIP) is most preferred is because rather than doing the hard work (of both timing and sizing), one hopes that over a long time, everything will average down and provide a better return than what one time lump-sum can provide (a thesis that can be easily tested).

Yet, its surprising that the very same people who argue for SIP argue against a Exchange Traded Fund claiming that since some funds (remember, Survivor Bias makes the whole testing meaningless) have given true alpha and hence in the Indian context Mutual Funds are better than Exchange Traded Funds. If timing is not possible, how can you really hope to pick up the right funds (average return of funds are generally lower than their bench-mark which means that there are a lot of funds that under-perform) all the time?

But I am digressing, this post is not for or against SIP. This post is about whether it makes sense to even follow Analysts / Fund Managers who claim to be right. Today morning for example, a famous PMS fund manager posted about how he hoped investors took advantage of his bullish tweets and invested in the market. But guess what, I scrolled through the gentleman’s twitter feed and he has tried to call markets bottom at every major level.

His target for Nifty (since Jan 2015) is 10,000 and I am sure he will be right. But how many have the ability to withstand the pain that came in between. Stocks, fancied or not have had a hell of a time in recent months with even marque names taking a substantial beating.

To me, timing is crucial – its easy in hindsight to say that, all you needed to do was sit tight, but sitting tight is not the answer most of the time unless you want to be like the average investor. But a average investor has no clue and does no home work, so why should your returns mirror his?

The future is unknown. Yes, we can make speculative / probability based guesses about it, but truth be told, no one has a clue of how it will unfold. The investors who have done big for themselves didn’t make it by taking small risks that will not hurt them if they got their Analysis wrong. Concentration was the key – it made some guys while broke many others.

As a parent, would you ask your ward to give his best (and hopefully come on top) or say, you know what – do as much as the average kid on the street. Why bother with hard work as Edgar Bergen says — ‘Hard work never killed anybody, but why take a chance?